Teijin Ltd

TSE:3401

Earnings Call Transcript 2021-Q1

[Yoshihisa Sonobe, executive]

This is Yoshihisa Sonobe, Senior Executive Officer, Representative Director of the Board. In the lower right-hand corner of each slide, you can see the page number.

Please turn to Page 1, impact of COVID-19 during the first quarter. Level of impact differs from business to business. So let me go over that. First, in Tier 1 automotive business, in line with the operation level of OEMs, there is a rather direct effect being felt. In April, as most OEMs stopped plant operations, our Tier 1 automotive business significantly decreased factory operation. Whereas in other materials business, which is rather high upstream, given inventory buildup within the supply chain, state of operation was quite different from that of automotive OEMs.

In April, materials, especially aramid and others, enjoyed a certain level of demand as users tried to secure inventory and, therefore, barely felt the impact of COVID-19. Then in May, particularly mid-May onward, Tier 1 automotive business resumed production activities. Still, it remained to be a partial resumption, and demand recovery was gradual.

But in businesses related to SUVs and pickup truck productions, which are the main product lines of OEMs, the business picked up rather early on. And then in June, some regions experienced a rise in infections and demand recovery slowed down. At that point in time, materials-related businesses closer to the upstream began to feel the impact. The impact of declining production at OEMs began to emerge with some time lag.

Within Teijin, in terms of management strategy, we have implemented furloughs according to factory operation adjustments. In particular at CSP, Continental Structural Plastics Holdings Corporation in the U.S., we laid off some of employees as layoffs are a more common form of adjustment in the U.S. auto industry. In addition, as common efforts to all businesses, we've advanced fixed cost reductions and carefully examined capacity expansion and other projects and reviewed implementation schedules.

And amid the spread of COVID-19 infection in early Spring, some businesses embarked on securing inventories in consideration of the risk of production suspended at some factories. These actions were taken especially in Europe, including Germany and the Netherlands, where the actual cases of infections were reported.

Regarding business operations, in addition to thorough implementation of telecommuting, we have started to consider and study a new form of business operations in the new normal.

In terms of initiatives for society, after receiving orders for medical gowns, we successfully supplied in more than planned quantities, ahead of schedule. Also, regarding pharmaceuticals, we have secured a supply system to contribute to the development efforts of a possible therapeutic agent for COVID-19.

Page 2. This is almost a repeat, but we are showing trends in main markets, first, aramid and composites. These focal markets are automobile-related markets. Particularly in the first quarter, the demand decreased significantly. As for the second to the fourth quarters, we project recovery in Europe to be gradual, whereas in the U.S., a quick recovery is observed in the second quarter, driven mainly by SUVs and pickup trucks. But after that, the spread of recovery is expected to be rather moderate.

Aircraft and carbon fibers, Europe and the U.S., demand has dropped significantly in all applications. Sluggish situation is expected to continue through the second to fourth quarters. We -- with prolonged decline in aircraft demand, build rate is falling significantly. We expect tough situation to continue over medium term. It is hard to forecast the timing of recovery, but genuine recovery seems unlikely before 2023.

Health care is generally firm, expected to remain firm for the second to the fourth quarters. But we need to pay close attention to the extent of the effects of patients refraining visiting hospitals or receiving surgeries as well as to possible delays in our R&D activities.

Page 3, key points of today's presentation. Business performance for the first quarter. The Materials business suffered a large impact from COVID-19, whereas the Health Care business and IT business felt only a slight impact, posting firm business results. Similar trend expected regarding the outlook for fiscal 2020.

As for the first quarter, net sales were down 17% year-on-year at JPY 179.1 billion and operating income was down 26% at JPY 12.6 billion. Revenues and earnings declined in the Materials business, which mainly serves automotive and aircraft markets. Operating loss was recorded in the first quarter. The Healthcare business and the IT business posted firm results. The Fibers & Products Converting business recorded an increase in earnings year-on-year, partly boosted by orders received for medical gowns.

The full year outlook generally shares the same trend as in the first quarter results. Having carefully examined our operating forecast in light of the first quarter results, we have decided to maintain our previous outlook for consolidated net sales and operating income.

We have made a downward revision to our forecast for profit attributable to owners of parent due to the impact of an increased tax burden rate, reflecting a decline in income in overseas subsidiaries. We expect a decrease in revenue and earnings from the previous year.

The Materials business expects the amount of loss to narrow on a full year basis, with the profit to be recorded in the fourth quarter. Still, operating loss is projected for the full year.

The Health Care business and IT business expect strong earnings power to continue.

In the Fibers & Products Converting business, which posted decent results for the first quarter, a year-on-year increase in earnings is expected for the full year.

Page 6. I'll skip this since I've already explained most of what's shown in this slide, other than to highlight that the profit attributable to owners of parent dropped 47.1% at JPY 5.7 billion.

Next, Page 7, summary of operating results. I've already talked about net sales, operating income and profit attributable to owners of parent. For the rest, such as nonoperating items and extraordinary items, nothing particular to note. Net of nonoperating items was about the same year-on-year. Net of extraordinary items was also about the same, although the breakdown has changed. ROE was 5.7%, as profit attributable to owners of parent dropped significantly. EBITDA was JPY 25.6 billion, down JPY 3.9 billion. Among other items, CapEx, depreciation and amortization, and R&D expenses posted little change year-on-year.

As for exchange rate, yen appreciated compared to the previous year, and average Dubai crude oil price dropped significantly to $31.

Starting on Page 8, operating results by business. First, the Materials. Net sales dropped sharply by 37% year-on-year, and EBITDA was down 50%. Operating income decreased by JPY 7 billion, posting a loss of JPY 1.4 billion.

The bridge chart below shows the factors for changes in EBITDA. The biggest factor was a volume decrease due to COVID-19, totaling JPY 11 billion. Sales price and mix included effect of changes in sales mix in carbon fibers and lower sales price for resins.

Raw material and fuel cost had positive effect on EBITDA, as prices of raw material and fuel costs generally decreased during this period. Between these 2 factors, the net effect was slightly positive during the first quarter.

Others, including fixed cost reductions, activity level was affected amid mobility restrictions and emergency declarations, resulting in lower SG&A expenses. We also took proactive measures to reduce costs, taking this opportunity, including such measures as changing the format of exhibitions from face-to-face to online settings. We are taking various actions to reduce cost.

By business subsegment, as described on the right-hand side, in Aramid Fibers, sales volume declined due to a decrease in demand for automotive applications, such as reinforcement materials for tires and friction materials, while sales for optical fiber applications was firm.

In Polycarbonate Resin, demand recovered in China but fell sharply in other regions, resulting in lower volume.

In Carbon Fibers, sales volume decreased across almost all applications, primarily aircraft applications. Still, upfront investments continued primarily for the development of intermediate materials and the construction of a new plant in the U.S., including recruitment of people.

In Composites, production at automakers, which are the customers of CSP, was suspended almost completely in April, then began to recover in mid-May and continued to recover steadily in June and July, back to almost full production in July. But subsegment sales volume was down significantly during the first quarter. Still, CSP's facility operating rate gradually improved along with recovery in automakers' capacity utilization, mainly in SUVs and pickup trucks manufacturing.

Page 9, Health Care. Operating income was down JPY 1.8 billion compared to the previous year. Factors for changes in EBITDA are shown below. There are lots of factors for increase and decrease. But in a nutshell, the effect of the NHI drug price revisions persisted. In terms of volume, we felt the adverse impact of the generic product launch overseas, while in Japan, sales were firm, posting a slight positive. The impact of NHI drug price revisions was minus JPY 2 billion. On the other hand, as sales and other activities were restricted, including refraining from making hospital visits, SG&A expenses and R&D expenses were reduced.

By subsegment, in Pharmaceuticals, sales of FEBURIC were affected by the NHI drug price revisions, but volume increased steadily. In Home Health Care, the rental volume for CPAP, continuous positive airway pressure, units increased year-on-year. However, the number of inpatient screening declined due to COVID-19.

In home oxygen therapy, HOT, the rental volume for therapeutic oxygen concentrators increased against the backdrop of an increase in adopting home health care to avoid in-hospital infections and to secure hospital beds for serious patients.

In New Health Care, which consists of implantable medical product business, including artificial joints and absorbable osteosynthesis materials, the effect of COVID-19 was felt in terms of postponement of elective surgeries.

Page 10, we have changed the segment disclosure from this quarter. The Fibers & Products Converging business that were previously included in Materials is now shown separately. And Infocom, the IT business, which previously was a part of Others, is now disclosed as a separate independent business.

In the Fibers & Products Converting business, operating income increased by about JPY 4 billion. As described on the right side, in Teijin Frontier's Fibers & Products Converting, sales increased for raw cotton and nonwoven fabric for personal hygiene products and health care products to prevent infection, including medical gowns. On the other hand, textiles, heavy clothing and automotive materials struggled due to the impact of COVID-19. Sales remained favorable for infrastructure reinforcement materials and polyester staple fiber for water treatment membranes.

SG&A expenses decreased by the efforts to reduce expenses and increase telecommuting, which served to push up profit rather significantly. In addition, there was an effect of sales in China for the fourth quarter of fiscal 2019, which were almost 0 from January to March, having shifted to this first quarter, April to June. Profit increased due to all these factors.

In the IT business, operating income was up JPY 700 million as IT service applications for corporate remained firm and the e-comics distribution service, posting a steady performance against the backdrop of increased demand as people spend more time at home. Operating income as a result rose year-on-year.

Page 11, nonoperating items. As mentioned earlier, nothing special to note. And the same for extraordinary items, nothing particular to note.

Please turn to Page 12 for financial position. Total assets slightly increased from the end of the previous fiscal year, while interest-bearing debt increased JPY 9.5 billion. Cash and deposit also increased JPY 4.8 billion, resulting in a net increase of a little under JPY 5 billion.

Regarding changes in total assets, trade receivables decreased due to declined sales. To explain increased inventory, please refer to the footnote. As I said at the beginning, with COVID-19 pandemic in Europe, there were risks of plant shutdown. So we built up inventory to preserve supply chains for aramid and carbon fibers. However, the inventory is estimated to decline toward the end of FY 2020, and this will require a production adjustment from Q2 through Q4 to affect the full year forecast. That is all for the results of the first quarter.

Next, let me move on to the full year outlook for FY 2020. Please turn to Page 14. This page summarizes our assumptions for FY 2020. In the previous outlook announced in May, the most significant impact of COVID-19 was estimated for Q1, followed by a gradual recovery in Q2 and Q3, then the outbreak would come to an end in Q4 and things would go back to normal. That was the assumption we used to develop the previous outlook.

In the outlook this time, the decline in Q1 is much deeper than the previous outlook. And in Q2, we expect our business will bottom out with a decline as much as or a little greater than that of Q1. This is because the impact on upstream process is delayed by 2 to 3 months in contrast to the Tier 1 related business, which is linked to what's happening in the automotive OEM. But even after this bottoming out in Q2, we expect a gradual recovery.

These assumptions, including industrial market trends, such as automotive and aircraft markets, are based on IMF reports and user interviews. We do not expect a full recovery in Q4. Rather, it would be achieved in FY 2021 or later, with some deviation in timing depending on businesses within the segment.

Under such a circumstance, it is rather difficult to disclose an accurate full year forecast. Therefore, we may need to revise the forecast during the fiscal year as we closely watch the situation and progress.

Please turn to Page 15 for highlights of the outlook compared with the results of FY 2019 and the previous outlook. Revenues and earnings decreased from FY 2019, same as we announced for Q1. From the previous outlook, while downward revision was made only for profit attributable to owners of parent, operating income includes some ups and downs within the item.

Materials segment, which focuses on automotive and aircraft markets, is estimated to decline year-on-year in revenue and profit to record operating loss. Despite the impact of drug price revisions, Health Care segment expects only minor impact by COVID-19 in this fiscal year, just like IT.

Our previous outlook for net sales and operating income remains unchanged. However, declining income in overseas subsidiaries in the red will lead to increased tax burden rate as tax effect accounting is not applied for them as we experienced in Q1. As a result, we made a downward revision for the estimate of profit attributable to owners of parent from JPY 23 billion to JPY 20 billion.

The assumption for foreign exchange rate for full year FY 2020 is JPY 108 to the dollar and JPY 120 to the euro. Currently, yen appreciates against the dollar and depreciates against the euro. With such foreign exchange trends in opposite directions, it is rather difficult to predict the impact. Still, we do not expect a large foreign exchange effect for the time being.

As for the crude oil price, it is over $40 per barrel now, so we set our assumption for FY 2020 as $38 per barrel. Dividend is undecided as there are many uncertainties and market demand cannot be determined, and it is difficult to have an outlook for 6 months or 1 year, considering each business is affected in different timings and difficulties to have a clear outlook for demand.

Next, please turn to Page 16 for PL figures. They have not been changed from the previous outlook with net sales of JPY 750 billion, operating income and ordinary income of JPY 40 billion each. Only profit attributable to owners of parent is revised downward from JPY 23 billion to JPY 20 billion. ROE is down to 5%. ROIC is unchanged at 6%, and EBITDA is also unchanged. CapEx is JPY 70 billion, which is same as in the original outlook, although it includes some changes in priorities and implementation timing. Depreciation and amortization remains unchanged as well.

Please turn to the next page for figures by segment. Let me explain with operating income shown at the bottom. Full year forecast for Materials segment is minus JPY 2.5 billion and Fibers & Products Converting is JPY 9.5 billion, with an expected year-on-year increase of JPY 4.1 billion. Health Care is JPY 29 billion, with a slight upward revision from the previous outlook. IT is JPY 9.5 billion. It was announced as JPY 10.1 billion in the financial results announcement of Infocom, but it is estimated as JPY 9.5 billion in the consolidated outlook of Teijin. In total, operating income is estimated as JPY 40 billion unchanged from the previous outlook.

For Materials, decreased revenues and earnings are expected, same as Q1 due to significant impact of COVID-19, but we expect operating income will bottom out in Q2 and gradually recover in Q3 and Q4. I will explain about it later.

Regarding Fibers & Products Converting, while COVID-19 severely affects fiber materials and apparel as well as industrial textiles and materials, which are our core business areas, we estimate year-on-year earnings increase for this segment, owing to products like medical gowns.

In Health Care, segment earnings are estimated to decrease year-on-year due to significant impact of drug price revisions despite steady growth of FEBURIC.

IT is forecasted to increase revenues and earnings by maintaining its strength in e-comics sales.

Please turn to Page 18. This presentation only covers Q1 results and full year outlook, and figures for other quarters are not included. On this page, we provide a summary of our thinking about those other quarters. Bar charts on the slide show the summary of FY 2019 results and FY 2020 outlook. The left bar of each chart indicates results in the first quarter, and the right one is the quarterly average of Q2 through Q4. It is obvious from the charts that performance in the later part of the year becomes lower than the first quarter as we have concentration of expenses and other seasonal factors in Q4. And this fiscal year will follow the tendency.

Under such a circumstance, losses in the Materials segment are estimated to shrink, as described on the right. The graph shows JPY 1.4 billion loss in Q1, and the average loss of Q2 to Q4 is JPY 400 million. JPY 400 million multiplied by 3 equals JPY 1.2 billion, and this tells us that the largest deficit will be recognized in Q2, and it will start recovery in Q3, and it will become profitable in Q4.

It is expected the impact of the inventory built up in Q1 to preserve supply chains will be visible in Q2 and later. This will lead to holding back plant operations during the recovery phase to cause a negative effect, and this will make the recovery a little weaker.

From Q2 onward, we estimate upfront investment costs such as development expenses as well as seasonal factors, including routine maintenance in resin and plastics processing in Q2 and Q3, resulting in a slower recovery.

In Fibers & Products Converting, in Q1, we saw contributions from medical gowns. And while this will continue in Q2, as there is a request for a large-scale supply, such a contribution will be gone in Q3 and Q4. With that, COVID-19 impact on apparel and automotive products will be visible, and the performance of this segment will be weaker with the estimated decrease in operating income from JPY 5.1 billion in Q1 to JPY 1.5 billion as an average of Q2 to Q4.

Health Care will remain unchanged from FY 2019. R&D costs will be recognized in Q4 to lower the average for the later part of the year.

IT is expected to continue its strength with steady growth.

Page 19 shows the overview of changes in EBITDA forecast. I assume it will be easier to understand by segment, so please turn to the next page for Materials and Health Care segments.

The top part of Page 20 is for Materials segment. Volume is minus JPY 22.5 billion to reflect declined demand in all areas of aramid, resin and plastics processing, carbon fibers and composites. Sales price and mix also has a negative figure due to sales price decline and smaller spread on resin and plastics processing and changed sales mix of carbon fibers affected by a lower demand for aircraft. Aramid is projected to maintain the price. Raw material and fuel cost have positive effects in all areas. In others, EBITDA is expected to increase on a full year basis by decrease and reduction of fixed cost.

In Health Care segment, volume is positive JPY 1 billion, with the decrease in overseas market affected by the launch of generic drugs, which is to be offset by increase of FEBURIC and home health care in Japan. Sales price and mix is mainly affected by the drug price revisions. Others are estimated to increase by lower R&D and SG&A costs due to reduced activities.

Next page is about financial KPI. This fiscal year is the first year of the current medium-term management plan, and there is a gap between FY 2020 outlook and the target in FY 2022, the last year of this medium-term management plan, and the ideas are summarized in the next page, Page 22.

Regarding short-term efforts, we will try to minimize the impact of COVID-19 as much as we can by taking measures to promptly remove the negative impact, even though this will depend on the demand recovery. Those measures are to promote production and sales activities without delay by promptly addressing changing demand during recovery, to change and rationalize the way of sales with reduced fixed costs and to continue investment as we carefully consider the best timing and priority in this rapidly changing market environment. These are the short-term efforts.

Under such a circumstance, our medium- to long-term targets will remain unchanged, and there is no change to important social issues that Teijin Group addresses. We assume the social needs in the Asia of new normal is in line with our medium- to long-term direction.

We expect growing need, for instance, for our lightweight solution for mobility in the recent trend of green recovery and also for online medical services related to home health care in the age of COVID-19.

So our medium- to long-term policy will remain unchanged and we'll execute our strategy as is. Still, some changes in the time line might be required even with the unchanged direction. Also, we will take measures to find new business opportunities in the age of new normal.

That is all for my explanation.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]